Monetary policy: SBP slashes interest rate by 100bps to 8%

Improved inflation outlook provides central bank room to cut rate

KARACHI: In line with market expectations, Pakistan's central bank has cut the benchmark interest rate by 100 basis points to 8% to help people, businesses and the economy fight against the coronavirus pandemic.

The State Bank of Pakistan (SBP) announced the decision taken by its monetary policy committee (MPC) in a meeting on Friday.

A further drop expected in the rate of inflation provided a room to the central bank to having cut the rate.

“This decision reflected the MPC’s view that the inflation outlook has improved further in light of the recent cut in domestic fuel prices. As a result, inflation could fall closer to the lower end of the previously announced ranges of 11-12% this fiscal year and 7-9% next fiscal year,” a statement issued by the bank stated.

The interest rate is a tool available with SBP to create a balance between the rate of inflation and economic activities in the country.

The MPC highlighted that the coronavirus pandemic has created unique challenges for monetary policy due to its non-economic origin and the temporary disruption of economic activity required to combat it.

While easier monetary policy can neither affect the rate of infection transmission nor prevent the near-term fall in economic activity due to lockdowns, it can provide liquidity support to households and businesses to help them through the ensuing temporary phase of economic disruption.

“In particular, the successive policy rate cuts and sizeable cheap loans provided through the SBP’s enhanced refinancing facilities have helped maintain credit flows, bolster the cash flow of borrowers, and support asset prices.”

This has contained the tightening of financial conditions that would otherwise have amplified the initial necessary contraction in activity.

The coronavirus has badly hit economic activities. The lower interest rate on outlook for low inflation would help the economy to recover by 2-3% next fiscal year (FY21) compared to projected negative economic growth in range of 0.5-1.5% in the current fiscal year ending June 30, 2020.

The recent massive decline in petroleum oil prices in the international and domestic markets should further tame inflation to 8% in the months to come.

The inflation fell to a 10-month low at 8.5% in April. It, however, remained slightly higher than 8.3% in the same month of April last year, according to Pakistan Bureau of Statistics (PBS).

The committee noted the swift and forceful monetary easing of 525 basis points in the two months since the beginning of the crisis and SBP’s measures to extend principal repayments, provide payroll financing, and other measures to support liquidity.

Together with the government’s proactive fiscal stimulus―including targeted support packages for low-income households, SMEs, and construction―as well as assistance from the international community, these actions should provide ample cushion to growth and employment, while also maintaining financial stability.

“This coordinated and broad-based policy response has provided relief and stability and should provide support for recovery as the pandemic subsides.”